The growing demand for cyber insurance is driving increased interest in the cyber insurance-linked securities (ILS) market, with cyber catastrophe bonds emerging as a key tool for risk mitigation, according to a new report from S&P Global Ratings.
In its latest analysis, S&P highlights the increasing importance of assessing the creditworthiness and risks associated with these “innovative financial instruments,” noting that factors such as regulatory risk, policy terms, cedent risk, asset risk/collateral, and modeling requirements all play a role in determining the credit quality of cyber ILS transactions.“Cyber insurance demand continues to grow, with premiums reaching approximately $14 billion in 2023 and likely to rise by an average 15%-20% per year to about $23 billion by the end of 2026,” analysts said.
“As companies realize the importance of their digital assets, processes, and sensitive information, they’re looking to insurers for cyber risk protection and risk management-related services. These services include crisis management, data recovery, and legal and regulatory communications.
“The insurance industry has been improving its understanding and pricing of everyday attritional cyber losses, but the frequency of events and resulting losses continue to rise. This has led the sector to seek additional capacity to provide coverage in this area.”
Since their introduction to the market in 2023, cyber catastrophe bonds have gained traction as an alternative risk transfer mechanism, enabling insurers and reinsurers to expand their capacity by shifting portions of cyber risk to the capital markets.
These bonds offer access to a broader, more scalable investor base, helping to diversify exposure and strengthen the cyber insurance market’s ability to withstand large-scale cyber events.
You can read about every cyber cat bond transaction, including the first private cat bond deals and the more recent 144A cyber cat bonds, by filtering our Deal Directory by peril to view only cyber cat bond transactions.
Furthermore, analysts noted that the investor base for cyber ILS remains relatively limited, with few leading investors participating in each transaction.
“Attracted by compelling returns, most investors have taken small allocations but generally do not view these investments as a primary means of diversifying risk, given the possibility of write-offs,” analysts added.
However, S&P states that investors could also find their collateral locked up for extended periods since cyber loss claims can be slow to fully develop after an incident is reported, which may make it difficult for investors to redeploy capital.
“Considering these factors, cyber ILS investors appear to be primarily interested in transactions related to extreme (but remote) cyber risks structured as per-occurrence excess-of-loss coverage, rather than providing coverage for attritional losses related to smaller cyber incidents. A transaction based on frequency, rather than severity, may not offer the risk/return benefit to their portfolios,” S&P added.
